Divergence is a situation that occurs when two lines on a chart move in opposite directions vertically. Divergence can be comparing a stock's direction to the direction of its RSI, its MACD or a momentum oscillator. Divergence can also occur between two related asset classes such as the price of gold and the price of a gold stock. There are two kinds of divergences: positive and negative. Positive divergence occurs in a down trend when one line moves higher while the other is still declining. Negative divergence occurs in a uptrend when one line moves higher lower while the other is still rising.
Note our Dow Industrials vs. Dow Transports chart with the Industrials are just at or above the January peak – now note the Transports are well below the January peak setting up a negative divergence condition. This could be the early setup for a Dow Theory sell signal and keep in mind that while rebound bulls are short they are never followed by severe crashes – but rather a short trendless bear – a stock picker’s market
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2 comments:
Hi Bill. Do you think we are into an intermediate term correction that will take us to the 200-day MAs or a longer sideways bear market before a new long term secular bull market begins? How many weeks are we looking at in terms of duration?
Thanks,
Shawn
Hi Shawn
We are into an intermediate correction that could take many sectors down to the 200-day. The trigger is the increasing movement of capital away from risky assets (commodities) into safe assets (consumer staples, banks) – this could persist through April and then we enter a long period of sideways rotational congestion through 2011 – 2012 - a stock picker’s market. Just when most are fed up the new secular advance will get underway. My best guess for now
Bill C
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